It’s time to bring your business to the next level. Maybe you’ve recently launched and sparked significant interest in the market, or maybe you’ve been building the company for several years and have recently achieved a sustainable pattern of growth and momentum. Whatever stage you’re at—whether you’re looking for seed capital, early stage funding, or later stage financing—you’re entering into serious discussions with potential investors.
- Do you know which investors are worth your time and energy?
- Are you able to pick out the worthwhile sources of capital and smart strategic partners from the crowd?
If you can’t, you risk not only wasting your own time, but potentially setting your business up for significant legal and financial instability.
Identifying the best investors is about more than following the money. In a vast sea of opportunities, you need to look beyond wealth and assess whether a firm or individual has the necessary perspective and capabilities to help your company scale.
The right investor should possess the following characteristics:
To determine if an investor is right for your business, consider the following questions, keeping in mind that a “no” or “maybe” answer indicates you should look elsewhere:
Is the investor who they present themselves to be?
Before meeting with a potential investor, do your homework. Conduct some research. You should find out how long the investor has been in operation, where they’re located, and how they communicate their brand and values, as well as what companies they’ve supported and how those companies have fared.
The investor’s website and presence on social networking sites such as LinkedIn are good places to start. Look for recent activity, endorsements, press releases—anything that shows the prospective investor is alive, visible, and accountable. While con artists are rare, they pose a serious threat to your organization and intellectual property. It goes without saying that you shouldn’t share business confidential details, such as your financial status and client list, with just anyone.
Does the investor understand and have enthusiasm for your vision and business plan?
When pitching your business to an investor, pay close attention to their reactions. Worthwhile investors are great listeners: they will nod along, ask questions, and repeat what you’ve said back to you. They’ll show excitement and keen judgment at the same time.
Bad investors, by contrast, come to the table with nothing but preconceived notions about your and your organization. They’ll steamroll your pitch with their own ideas or show little interest in anything other than your financial projections. They may rashly commit to saying “yes” or seem entirely unmovable. In other words, aim for a yellow light rather than a pure green or red.
Do you understand what the investor wants?
How forthcoming is the investor about their objectives? There’s a fine distinction between discretion and circumspection. Even if your target isn’t hiding anything, per se, ambiguity regarding their goals could signal a deep uncertainty or reluctance to take charge.
Without a clear internal course of action, an investor has little incentive to spend their money. Moreover, it’s imperative to avoid any individual or group that would pull out or change their mind without warning. Look for someone committed, careful, and tactically-minded, but still motivated to assume risks when necessary.
Does the investor have a sound exit strategy?
Good investors seem like prognosticators—not because they know what will happen in a certain market, but because they understand how to plan for any outcome. Ask your investor: “What would a successful exit look like for you and me?”
When contemplating the best and worst case scenarios following investment, assess what your target intends to do through a multifaceted lens:
- How far in advance are they forecasting?
- Is the forecast realistic?
- Between going public, a buyout, and a merger or acquisition, what options are beyond consideration?
- What factors are non-negotiable?
As smart business owners know, it’s never too early to plan your exit. Talking through exit strategies at the outset will help you and your investor gauge expectations and thus work together more effectively.
Does the investor operate in a stable, consistent, and professional manner?
Take stock of your investor’s emotional state: Do they anger or panic easily? Volatility means unpredictability, and unchecked emotions could lead to a financial disaster or legal conflict down the road. Consider the target’s professionalism as well: Are they organized and timely or do they disappear for weeks at a time?
An investor may have the best intentions, but if they’re too busy or disorganized to engage fully with your business, they aren’t worth the effort. Avoid any behavioral tendency that could cause or exacerbate miscommunication.
Is the investor up-to-date on your industry?
An investor should certainly have experience, but perhaps more crucial is a solid understanding of the current business landscape. They should be at least as knowledgeable as you are—and hopefully more so—about trends and developments in your industry. Otherwise, their investment could be mishandled or become the cause of bitter disagreement.
Armed with insight into your unique situation, an investor can fully appreciate why you’re looking for the amount of capital you’re seeking rather than second-guess your motives.
Does the investor demonstrate a willingness to admit and learn from mistakes?
Finally, seek out an investor who can admit they’re human. When speaking about their backgrounds, portfolios, strategies, and philosophies, successful investors frame their histories as continual learning experiences. They take pride in their mistakes, as each one constitutes a valuable lesson they would have otherwise missed. And once they learn, they implement changes quickly.
This consideration isn’t merely about steering clear of potentially toxic, ego-driven personalities; it’s also a measure of rationality. If an investor can come to terms with their mistakes, chances are slimmer they’re making an error in supporting your business, and the longer they’ll be able to stick around.
Once you’ve identified a worthwhile investor, the next step is to convince them to invest. Your financial partner can help. At inDinero, we work one-on-one with business owners every day to grow their businesses and raise the capital they need. Download our free Guide to Accounting that Meets Investor Expectations.